WACCKnowledge Center 
Analyzing the cost of invested capital. Explanation of WACC. Weighted Average Cost of Capital. 

What is the WACC? DefinitionCorporations create value for shareholders by earning a return on the invested capital that is above the cost of that capital. WACC (Weighted Average Cost of Capital) is an expression of this cost. It is used to see if value is added when certain intended investments or strategies or projects or purchases are undertaken. WACC is expressed as a percentage, like interest. For example, if a company works with a WACC of 12%, than this means that only investments should be made and all investments should be made, that give a return higher than the WACC of 12%. The costs of capital for any investment, whether for an entire company or for a project, is the rate of return which capital providers would want to receive if they would invest their capital elsewhere. In other words, costs of capital are a type of opportunity cost. Calculation of WACC. FormulaThe easy part of WACC is its debt part. In most cases it is clear how much a company has to pay their bankers or bond holders for debt finance. More difficult however, is the cost of equity finance. Normally, the cost of equity capital is higher than the cost debt finance, because equity involve a risk premium. See also: Cost of Capital. Factors that make calculating WACC difficult:
The WACC formula: Debt / TF (cost of debt)(1Tax) + Equity / TF (cost of equity)  WACC In this formula,
Example of WACC calculation.Suppose the following situation in a company: The market value of debt = €300 million The WACC of this company is: 300 : 700 * 8% * (135%) + 400 : 700 * 18%  12,5% (WACC  Weighted Average Cost of Capital)
Compare with WACC: Cost of Capital  Internal Rate of Return  Net Present Value  Discounted Cash Flow  Cost of Equity Return to Management Hub: Decisionmaking & Valuation  Finance & Investing 

